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Moody’s: Estia is positive for banks

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Release of funds to subsidise nonperforming mortgage loan repayments is credit positive for Cyprus' banks, according to Moody’s rating agency.

On 21 January, Cyprus' parliament, through its finance committee, approved the release of €33 million (0.2% of Cyprus' GDP) to fund this year’s cost of Estia, a new government-sponsored subsidy scheme which aims to address nonperforming exposures (NPEs) backed by primary residences.

“The scheme's finalisation is credit positive for Cypriot banks because it will help reduce their high burden of NPEs and facilitate the resolution of a more troublesome segment of their problem loans”, the agency states in it’s weekly outlook.

Estia seeks to encourage distressed borrowers to start servicing their primary residence mortgages, subject to certain eligibility criteria such as income, wealth and property value. The criteria have been tightened to ensure that the scheme targets borrowers who are unable to repay their mortgages and excludes strategic defaulters.

The criteria include that loans must be secured by a primary residence with an open market value of less than €350,000; at least 20% of the borrower’s total credit obligations is past due for more than 90 days as of September 2017; annual gross income does not exceed certain thresholds, depending on the number of dependants, ranging from €20,000 for single people to €60,000 for families with at least four dependents; and that household net wealth, excluding the primary residence and associated loan, should not exceed 80% of the primary residence's open market value, with a cap set at €250,000.

The scheme aims to reduce outstanding principal, reduce the interest rate on loans and extend repayment. Eligible loans will be restructured to the contractual amount owed and secured by a primary residence or the open market value of the primary residence, whichever is lower. Eligible borrowers will then pay two-thirds of the installment on the restructured loan, with the government subsidising the remaining one-third. For borrowers who default during the repayment period, the subsidy will cease and the bank will initiate a foreclosure procedure.

Estia is a one-off initiative that is available to all Cypriot banks and other financial institutions, including credit-acquiring companies.

According to the authorities, gross mortgages of €3.4 billion are potentially eligible under the scheme. As a result, all Cypriot banks will benefit from the scheme's introduction, including Bank of Cyprus Public Company Limited (B3 positive, caa11) and Hellenic Bank Public Company Ltd. (B3 positive, caa1).

Bank of Cyprus will benefit most because it has gross mortgage NPEs of €900 million identified as potentially eligible under the scheme, based on the bank's available data, out of a total €5.0 billion of NPEs. If all its eligible loans are regularised, its NPE ratio would fall to 30% from 37% as of September 20182. Hellenic Bank's preliminary estimates indicate that €260 million of its €2.5 billion of

NPEs would be eligible under scheme, and its NPE ratio would fall to 28% from 31% as of September 20183 if all its eligible loans are regularised.The remaining balance of around €2.2 billion mainly relates to mortgages of the now-resolved Cyprus Cooperative Bank Ltd. that were transferred to a residual asset management company.

According to the agency, the banks' asset quality metrics will take time to reflect the improvement because the restructured loans will need to be performing for a year before they can be reclassified as performing.

Estia will help banks resolve a difficult segment of their loan book, given that foreclosing on primary residences is socially sensitive in Cyprus. The scheme will go live once the government and the participating banks finalise the governing legal agreement. The application process is likely to begin in the coming weeks. As the exhibit below shows, residential mortgages account for a significant proportion of rated banks' NPEs. The scheme also sets clear guidelines for banks to pursue foreclosures of primary residences above a certain value.